Bitcoin Futures Set Scene for More Gambling

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Traders at the Chicago Board Options Exchange on Monday. Late Sunday, the exchange opened trading in Bitcoin futures.CreditCreditKiichiro Sato/Associated Press

By Richard Beales

Dec. 11, 2017

Bitcoin action is now available without the Bitcoin. The Chicago Board Options Exchange started offering futures on the cryptocurrency late on Sunday. The new contracts open fresh avenues for trading, but for now they have little utility beyond speculation.

The one-month future surged more than 20 percent from the open to $18,700 before trading below $18,000 Monday morning. With the price of Bitcoin rising two-thirds this month alone, that seems fairly sedate. Volume was roughly $50 million, Breakingviews calculates, less than 0.5 percent of actual Bitcoin trading in the previous 24 hours, according to Coinmarketcap.com.

Futures have real-world value, allowing producers or consumers of a commodity to insure themselves against price movements, or helping investors to hedge their positions. In the Bitcoin world, there are so-called miners with investments in processing power and hefty costs like electricity who could use the contracts this way, but that’s about it. And with Bitcoin soaring more than 15-fold in 2017 to well over $16,000 early Monday, selling Bitcoin futures short is likely to be prohibitively expensive.

Most market players will be cautious until the contracts settle down. There are, though, other reasons for concern. Bitcoin futures aren’t perfect proxies for the real thing, partly because they will be settled in dollars, not the cryptocurrency, which trades at different dollar prices in different places. Chicago Board Options Exchange settlements, for example, will be based on Bitcoin’s value on the Gemini Exchange, established by Cameron and Tyler Winklevoss of Facebook fame.

CME Group’s Bitcoin futures, starting next weekend, will settle at a reference price drawn from multiple exchanges. One opportunity could be arbitrage, exploiting the pricing discrepancies. But it will take time for any patterns to emerge.

Proponents reckon that the entry of two big, regulated United States exchanges bolsters the legitimacy of Bitcoin. It certainly broadens the universe of possible investors, and it invites the creation of new exchange-traded funds, which need a liquid benchmark to track. That would bring Bitcoin exposure to retail investors.

Yet the Futures Industry Association, which represents clearinghouses and big banks, is apprehensive about the light regulatory scrutiny so far. And making the contracts cash-settled means the exchanges — and their customers — can now ride the Bitcoin bandwagon without touching the cryptocurrency at all.

Richard Beales is deputy editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.